According to a report by AKD
Securities, profits of listed banks were up five per cent quarter on quarter (QoQ)
in 2QCY11 and the analyst expects a similar growth trend during third quarter
(July-September).

This should occur due to modest net
interest income (NNI) growth (despite net interest margin (NIM) compression) and
likely higher non-interest income. Although, the brokerage house expects asset
quality to improve after a lag, immediate respite may arise from proposed
conversion of circular debt exposure into Pakistan Investment Bonds (PIBs).

On the back of easing monetary policy,
banks having larger appetite for PIBs are likely to benefit. These include NBP,
HBL, UBL, HMB, BAFL, and AKBL. Fully cognizant of the emerging challenges to the
economy, analysts believe there is an opportunity for near-term gains in banking
sector, particularly because 1) banks have shed 15 per cent calendar year to
date trade at highly attractive valuations and 2) banks tend to return their
best price performance in the January-March quarter. The 'big five' are expected
to be the major beneficiaries of the emerging situation.

Commercial banks' deposits were up 16
per cent year on year (YoY) at end August while funds flow continued to channel
into government securities, investments was up 48 per cent YoY, whereas advances
grew by paltry three 48 per cent. NIMs are likely to shrink during 3QCY11
(weighted average July spreads of 7.8848 per cent represent a peak). Similarly,
NII is likely to continue to show modest sequential growth due to growth in
earning assets.

The overwhelming perception was that
asset quality would improve with a lag. However, the banks are likely to witness
some increase in non-performing loans (NPLs) after devastating floods in Sindh.
The data available with the State Bank of Pakistan (SBP) indicated that
provisions were up a relatively high Rs9.5 billion in July and August, largely
due to ageing.

However, fresh delinquencies in
September may lead to further provisioning. A positive point is that asset
quality is likely to improve following successful conversion of circular debt
into PIBs, leading to declassification of NPLs, improvement in NPL/coverage
ratios and recognition of suspended markup.

Sequential growth will be driven by 1)
higher dividend income as most of the listed companies in Pakistan follow the
fiscal financial year and announce payouts along with full year results and 2)
higher forex income, as gains on this front tend to enhance with currency
volatility. Rupee has already depreciated over two per cent since commencement
of the current year.

However, capital gains may be
lower/impairment may be higher due to erosion of values in third quarter. The
SBP reduced the discount rate by 50bps in July, which bodes well for the banks
as they stand to gain on their fixed income portfolio particularly the long-term
PIBs.

Continued monetary easing should lead
to higher book values for these banks, which should compensate for lower NIMs.

Based on the content of the report,
this can be said with certainty that the commercial banks have emerged stronger
in Pakistan. Therefore, lending up to five per cent of the total deposits to
micro enterprises and SMEs at concessional rate can help in creating new job
opportunities at grassroots levels that can help subsequently in increasing per
capita income of those who have not become part of the banking system. It was
only during the chairpersonship of Dr. Shamshad Akhtar that the central bank
made it mandatory for the banks to pay five per cent return on saving accounts.

It is also on record that at onetime
commercial banks were willing to pay the penalty but not to lend to the
agriculture sector. At present, loan disbursement to farmers hover around Rs250
billion. In no way, the level could be termed satisfactory/sufficient keeping in
view the importance of agriculture in Pakistan's economy. The only point of
respite is that the overall lending to farmers is on the rise. Insurance
companies have played a key role in hedging the risk of lending to a business
segment, which is highly exposed to natural calamities. Since the incidence of
risk is being reduced, it will not be out of place to demand reduction in
interest rate being charged from the farmers.

It has been observed that 100 per cent
lending to the farmers is not insured. Since the banks are custodians of small
savings of masses, the central bank must ensure that all sorts of credit
extended to the farmers carry 'credit insurance' and in case any bank is found
lending to farmers without this cover, heavy penalties should be imposed.

Risk hedging will also enable the banks
to: 1) lend more money to farmers and 2) charge lower interest from them. Let
one point be kept in mind that bigger the pool of insured people/business
entities lower is the risk. Since the frequency of natural calamities are on the
rise around the globe as well as in Pakistan, all sorts of credit disbursed must
be fully insured.

After the commencement of business by
the Takafal operators, no one should be allowed to take refuge behind a
perception that risk mitigation is not permissible in Islam.

It must be appreciated that the central
bank is trying hard to bring down the interest rate in the country. The rule is
simple if the average capacity utilization of various industries is far below
optimum capacity utilization, the probability of delinquency remains high and no
investor would be keen in adding new productive facilities.

One of the options could be that the
central bank facilitates lending for captive power plants at concessional
interest rate and the government should abolish all sort of duties and taxes on
import of generators.